Current Affairs 2022: Reimagining Healthcare System with Blended Finance

By Farzan Shaikh

Recently NITI Aayog released a report regarding the need and relevance of Blended Finance to improve the healthcare system in India. Read further for the highlights of the report.

It is not a secret that when the Covid-19 pandemic took the world by storm, India like many other countries was unprepared in handling the scale and complexity of problems suddenly brought to us by the novel coronavirus. India’s existing healthcare system which was already fragile was left overwhelmed with the rampant spread of the virus and the surge in cases. This crisis was a reminder that proper attention is required to reform the healthcare system and this can be done through capital investment in developing market solutions and innovations. The kind of capital required cannot be raised alone from the government or philanthropic sources and thus the need for private sector investment arises.

However, the perceived risk in the social sector is too high to meet the return expectations of the private players and hence, we need a way to convince the private investors by ensuring that they can get returns equivalent to the market expectations by investing in the social sector as well and thus blended finance as a tool comes to our rescue. So, before we discuss further, let us first try and understand what blended finance means –

What is Blended Finance?

By definition, blended finance is an approach towards financing where catalytic funding (e.g., grants and concessional capital) from the public (government) and philanthropic sources (NGO, charities, etc.) is utilized to raise private sector investment which enables fulfilment of social goals and outcomes. Blended finance is the strategic use of concessional capital and private capital in projects where the perceived risks are too high for private players to participate alone as explained above. Blended finance combines concessional (grants, charities, etc) and commercial capital to achieve acceptable risk/return profiles for different types of financing partners.

So the main barriers faced by private investors which can be solved by blended finance are –

• High perceived risk on an investment opportunity
• Poor returns for the kind of risk they will have to take relative to comparable investments somewhere else

So what blended finance does is that it leverages the philanthropic and public funds to attract private capital into deals. This helps finance projects and initiatives that drive social, economic and environmental progress and at the same time ensures that the private investors earn returns that are in sync with market expectations at the expense of public and philanthropic funds if required.

Now let us understand how blended finance can be used to improve healthcare in India

Improving Healthcare In India With Blended Finance

Currently, India’s healthcare expenditure is at 3.6% of GDP, including out-of-pocket expenses and public expenditure. When we look at just the government expenditure (both central and state), it comes to 1.29% of GDP which is the lowest amongst BRICS nations. For example, Brazil spends 9.2% of their GDP, followed by South Africa at 8.1%, Russia at 5.3% and China at 5%. The National Health Policy has mandated states to increase health spending on primary care by at least 10% every year to eventually reach the target spending of 2.5% of GDP. The government has allowed 100% FDI in almost all sectors and this has resulted in more than 110 private equity (PE) and venture capital (VC) investors have invested in the healthcare delivery space, with a transaction value of USD 1,275 Million but the investment and capital raise have been from established market players with a strong focus on profitability and growth instead of accessibility and affordability.

To address this, the Government of India has launched the flagship initiative Ayushman Bharat (AB) Pradhan Mantri Jan Arogya Yojana (PM-JAY) the world's largest non-contributory Government-sponsored health insurance scheme that will increase access to healthcare for poor families. Ayushman Bharat aims to reach 500 million poor people, increasing demand for secondary and tertiary care by one crore hospitalizations per year. It is estimated that 3 lakh new beds will be required. Innovations, both in terms of technology and financing will play a vital role in bridging this gap.

The adoption of new technologies and innovation will require estimated funding of USD 156 billion and hence the solution proposed here is blended finance, i.e using a combination of public and philanthropic (NGOs, charities etc.) and commercial (equity or debt) capital to create new funding structures towards achieving developmental impact in healthcare.

Following are the investment opportunities listed in the report –

1. As much as 65% of hospital beds cater to 50% of the population in India which is mainly concentrated in Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Telangana, West Bengal, and Kerala. The remaining population has access to only 35% of hospital beds. To ensure accessible healthcare for the entire country, it is important to achieve a 30% growth in the number of hospital beds.
2. Since India's pharmaceutical sector is the third-largest by volume globally and the cost of production in India is around 33% lower than that of the United States India has the opportunity to boost domestic manufacturing. Recent government schemes with performance-linked incentives, as part of the Aatmanirbhar Bharat (Self-Reliant India) initiative, will also provide support in this endeavour.
3. The current size of the medical devices market in India is estimated at USD 11 billion and is expected to grow to USD 50 billion by 2025. That said, many start-ups in the medical devices space need growth funding to scale up and this funding can be achieved by blended finance.
4. With the Covid pandemic making social distancing a new reality, telemedicine solutions have emerged as a convenient alternative. The telemedicine industry is projected to increase to USD 5.5 billion in the next 3 years, growing at a CAGR of 31%.
5. Extensive smartphone and internet penetration in India opens up great opportunities for the growth of the telemedicine and e-Health industries.

To conclude, all of the above areas require significant investment from private and philanthropic sources. Blended finance can help leverage the private sector to fill this health funding gap across various sub-segments of the healthcare ecosystem. The private sector has the potential to play a pivotal role in reducing out-of-pocket costs for private services and making them more affordable and accessible for the masses.

Follow here for More Current Affairs Topics

About the Author

Farzan is currently pursuing PGP at the Indian School of Business. He has worked as a management consultant and a product manager for a global consulting firm for 3 years after graduating from NIT Nagpur with a B.Tech in Chemical Engineering in 2019.